Understanding Credit Cards: The 5 Components of a Credit Score

Credit and credit cards are an integral part of our economic system today. But there is a lot of misinformation and misunderstanding about credit. In this continuing series, we examine key concepts, tips and best practices when it comes to credit cards.

(10/12/2012) Credit scores are extremely important in obtaining credit cards, mortgages, and car loans, and may even play a role in some employment offers. It's critical to understand how your score is determined.

The three main credit bureaus (Experian, Equifax and Transunion) all base their credit scores off the main Fair Isaac Corporation (FICO) score. This score, which can range from 300 to 850, is calculated using a number of credit data in your report. They're grouped into 5 categories.

HISTORY
Your credit and payment history accounts for 35% of your overall credit score. Lenders want to ensure you have are a responsible borrower, paying back debt on time. That's why paying bills on time every time will result in an average credit score of over 700. Any late payments can quickly and dramatically drop scores, and result in higher interest rates.

DEBT
Your amount owed (total and by account) makes up 30% of your score. Your score is highly dependent on your credit utilization, meaning the amount you owe in proportion to your total credit limit. Generally, experts recommend keeping your utilization at around 25 percent on each credit account, and with your overall debt.

TIME
Your length of credit history accounts for 15% of your credit score. Generally, a longer credit history will increase your score, demonstrating that you are familiar with and even adept at credit. This category includes the length of time your credit accounts have been established, the average age of all your accounts, and the length of time since you used your accounts.

NEW
New accounts? It counts for 10% of your score. If you've opened a number of accounts all at once, that could count as a strike against your score. Instead, opening accounts over time is better.

TYPE
The type of credit you use accounts for 10% of your score. Higher scores will be assigned to people who have a good mix of credit cards, retail accounts, installments loans, and finance company accounts (mortgages and car loans).

While these percentages are typical, representing the importance of the categories per individual, it may vary. The importance of any one factor in your score depends on the overall information in your report. Plus, as things change, the importance of these changes may supersede previous assessments.

For Additional Reading:

The Five Factors of Credit Scoring: http://www.mortgagemasterwa.com/fivefactors_creditscoring.htm

What Info Goes Into My Credit Score?
http://www.consumerfinance.gov/askcfpb/317/what-information-goes-into-my-credit-score.html

 

 


 

 

 

 

Other related articles:

The Paradox of Credit: The Secrets of Good Credit that Defy Logic

Understanding Credit Cards: Checking Your Credit

Understanding Credit Cards: What is Credit?

Understanding Mortgages: What is a Credit Score?

Cashing in on your credit score

Fully free credit scores long overdue

Feds freeing up credit scores

Site to See: Federal Reserve's 'Credit Reports and Credit Scores'

 

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